Push to Curb Inflation Has CRE Ramifications

Deputy Prime Minister Chrystia Freeland is not an outlier in asserting that Canada is well positioned to curb inflation and recover from a downturn. Nick Axford, chief economist with Avison Young, concurs — predicting that a likely “technical recession” will be less severe than the prospects in Europe and that inflation will be on a downward trajectory by the spring of 2023.

“I think we’ll see inflation easier to tame in Canada,” he hypothesized during an online presentation last week. “Canada will probably be seeing declining GDP toward the end of this year and into the early part of next year, but we are not, in North America, expecting to see a really, really hard decline coming through. We are not expecting to see mass unemployment and business failures, but we will see some stress coming through in the economy.”

Real estate is in line for a share of the fallout, which has already taken form in a drop-off in investment transactions over the past couple of months. That’s in contrast to the first two quarters of 2022 and much of 2021, during which deal volume surpassed pre-pandemic levels. However, the steepest and most rapid rise in interest rates thus far this century has undermined that momentum.

“What we’re seeing at the moment is many investors stepping back and just waiting for the adjustment in pricing that they see coming to materialize in the market,” Axford said.

Looking at current economic dynamics — inflation, rising interest rates and the spectre of recession — he reiterated that inflation is the underlying ailment, while interest rates are the medicine with discomforting side effects.

Central bankers are attempting to reintroduce some slack into the system to avoid scenarios like the wage-price spiral of the 1970s. In doing so, they’re closing out an unparalleled era of low government bond rates and upending some comfortable assumptions. Axford characterized the years since the financial crisis as a “gravy train” in which real estate and other asset classes were benchmarked against rates of return that even fell into the negative zone in some countries.

“We need to start thinking about the fact that we are entering a different era in which interest rates are certainly going to be higher than the ultra-low, free-money level of rates that we got used to over much of the last 10 years,” he submitted. “What we’re heading back into is not an unusual blip that is likely to be quickly corrected. Interest rates as low as they have been over the last 10 years is actually the thing that is unusual.”

Uneven impacts foreseen, but with generally rising cap rates

In the months ahead, he expects a recession could diminish tenant demand, particularly for Class B office and assets in secondary and tertiary markets, while inflation could improve real estate’s profile for some types of investors planning to hold it for the long term. He also foresees rising cap rates across all property types as lower demand, higher financing costs and changing perspectives on risk and returns relative to other asset classes filter through to values.

“We are absolutely going to see cap rates coming under upward pressure,” Axford maintained. “The implication is that we’ll see, on average, 100 basis points minimum likely to be added to the benchmark cap rates that we’re thinking about for real estate, which a) will take some time to come through and, b) will come through unevenly. Some sectors will be more affected than others.”

Among those potentially harder hit, he cites a trifecta of challenges shaping investors’ outlook on Class B and aging Class A office buildings including climbing vacancy rates, more difficulty obtaining financing and higher costs (due to inflation) for required capital upgrades. On the flipside, he credits the trophy assets for bolstering market-wide average occupancy rates.

Avison Young’s proprietary Vitality Index — which tracks visits to locations via mobile phone data — shows a steadily growing influx into urban cores and downtown office buildings. Axford suggests the balance will continue to shift in favour of formal offices as each new wave of returnees exerts more pull on colleagues working from home. The shadow of job uncertainty in an economic downtown could also boost employees’ desire to be seen in the workplace.

“Broadly speaking, our cities are coming back to life and they’re coming back to life to the same level, if not more, than the period before the pandemic,” he observed. “The high-quality assets with great sustainability credentials and attractive, amenity-rich, accessible locations, I think they’re going to thrive. I think they are going to outperform. If I was buying anything, they would be very high on my list.”

Bank of Canada regarded as an early mover

Nevertheless, buyers are expected to be hesitant at least until the spring. A further 50 or 75 basis point boost in interest rates is also anticipated.

Axford noted that the Bank of Canada was the global frontrunner in raising interest rates — perhaps swaying both the Bank of England and the U.S. Federal Reserve to follow suit — and is a good bet to take the lead on cutting them again. However, given that the impact of interest rate adjustments typically take 12 to 24 months to work through the economy, he advises that central bankers are also in watch-and-wait mode.

“We expect to see that inflation is less endemic in Canada. They’ll be able to start cutting probably by the end of 2023, which isn’t something that we’re likely to see in many other parts of the world,” Axford said. “That said, don’t expect them to drop rates back to 1 per cent or below. The cuts are going be a quarter point and they are going to be largely symbolic to start with. It’s going to take some time to get back to what they reckon is a neutral rate, which is somewhere around 2 to 3 per cent.”

Source Toronto Star. Click here to read a full story

Discount Retailers, Grocers Driving Occupancy Rates up: RioCan CEO

TORONTO – RioCan Real Estate Investment Trust says retailers offering essential and discount goods are driving growth in its occupancy rates.

“We are certainly seeing growth in grocery, pharma and discount as well as the TJX banners (Winners, HomeSense and Marshalls) and Dollarama,” said Jonathan Gitlin, the Toronto-based realty company’s chief executive on a Friday call with analysts.

“Then we are also seeing in this kind of environment a significant return to service providers, whether they are nail salons, hair salons or medical uses, they are definitely net growers of space and certainly looking to occupy more and more of our existing space.”

Gitlin’s remarks came after RioCan said Thursday that occupancy across its commercial portfolio increased to 97.3 per cent in its most recent quarter, up from 96.4 per cent at the same time last year.

Retail occupancy for the real estate trust’s third quarter increased by 20 basis points from the prior quarter to reach 97.8 per cent.

Analysts have been watching occupancy rates closely over the last few years as retailers have adjusted to shifting health measures triggered by the COVID-19 pandemic and changing consumer habits amid high inflation rates.

While some retailers shrank their footprints coming out of the health crisis, others have seen demand for their goods and services surge and are on the hunt for new spaces.

RioCan’s portfolio is largely skewed toward necessity-based retailers like grocers, pharmacies and liquor stores seeking more space, but it’s also benefiting because there is a scarcity of some properties, said chief operating officer John Ballantyne.

Properties measuring between 1,858 and 2,322 square meters are in high demand as are smaller units between 139 and 185 square meters, he said.

But Gitlin pointed out that inflation has not eased to comfortable levels yet and a recession seems imminent, so “there is an elevated risk of tenant failure.”

Properties measuring between 1,858 and 2,322 square meters are in high demand as are smaller units between 139 and 185 square meters, he said.

But Gitlin pointed out that inflation has not eased to comfortable levels yet and a recession seems imminent, so “there is an elevated risk of tenant failure.”

Gitlin called it “a huge step in the right direction” because there is a supply crisis in markets in Toronto.

“It has been a frustrating process for RioCan, as a willing and able provider of housing both affordable and market in the last five years to go through all the hurdles we have gone through to get limited product in the ground,” he said.

“I can only imagine how difficult it is for groups that are less sophisticated and less well-capitalized than RioCan.”

On Thursday, RioCan reported a net income of $3.2 million, down from $137.6 million the year before.

Its property net operating income grew by 5.1 per cent, driven by increases in occupancy, rent growth and increases, and a lower pandemic-related provision.

Revenue totalled $305.3 million for the quarter ended Sept. 30, up from $264.1 million a year earlier.

Funds from operations totalled $134.8 million, or 44 cents per diluted unit, up from $126.9 million or 40 cents per unit the year before.

This report by The Canadian Press was first published Sept. 4, 2022.

Source Toronto Star. Click here to read a full story

CRE Bears Brunt of Property Tax Burden: Canada-Wide Update

Seven of the 11 major Canadian cities surveyed by Altus Group have a commercial tax rate more than double the residential tax rate, according to the 2022 Canadian Property Tax Rate Benchmark Report.

Altus Group released the annual report in conjunction with the Real Property Association of Canada (REALPAC). It’s intended to create dialogue with taxing authorities, influence public policy and to attempt to promote a healthy and competitive business environment for the commercial real estate sector.

Residential property tax rates in the cities surveyed ranged from a low of $2.69 per $1,000 of assessment in Vancouver to a high of $11.95 per $1,000 of assessment in Winnipeg in 2022. Corresponding commercial property tax rates ranged from a low of $9.31 in Vancouver to a high of $35.30 in Halifax.

“I think you’re always going to see the commercial property owners carry the heaviest burden,” Kyle Fletcher, president of Property Tax Canada at Altus Group, told RENX. “But, I think municipalities are recognizing the heavy loads commercial taxpayers are carrying.”

Business properties generally use fewer of the services paid for by property taxes, and business property owners don’t have the same voting clout as homeowners when it comes to impacting municipal governments.

However, business property owners may base decisions on whether to locate or expand in a municipality based on comparative property tax rates.

Quebec has highest commercial-to-residential ratios

Montreal’s commercial property tax rate was $34.66 and its residential rate was $8.23.

Montreal reduced both residential and commercial tax rates from 2021 to 2022, but the greater reduction to residential property owners resulted in a commercial-to-residential ratio increase of 1.08 per cent to 4.21.

That was the highest of the cities surveyed.

Quebec City’s commercial property tax rate was $35.28 and its residential rate was $10.05.

Quebec City raised commercial rates slightly while dropping the residential rate, increasing its ratio by 1.3 per cent to 3.51.

Vancouver’s taxes are lowest

Vancouver saw decreases in both residential and commercial tax rates.

However, the rate of taxation for residential properties dropped further than the commercial rate, so its commercial-to-residential tax ratio increased by 1.35 per cent to 3.46, ranking it third-highest in Canada.

The relative strength of the property market in a city has a bearing on its residential and commercial property tax rates.

“Vancouver has the lowest tax rates in both residential and commercial, and that’s really a reflection of the strength of that market — in particular the residential market,” said Fletcher, who noted the city’s higher property values can derive the revenues needed to meet the municipality’s requirements even with lower rates.

“Compare that against areas like Saskatchewan and Manitoba, where the average house prices are some of the lowest in the country, and you’re going to end up with higher rates.

“And wherever there’s a lower proportion of commercial property in one municipality to another, that can have an effect as well.”

Ontario keeps postponing reassessments

Ontario properties are in the second year of an assessment freeze following the last four-year assessment cycle and assessments continue to be based on values as of Jan. 1, 2016.

Any changes in the commercial-to-residential tax ratios in the province are the result of tax policies.

“The trend is positive for commercial buildings in Ontario,” said Fletcher. “So we would hope that, once they finally reassess in Ontario, that the trend will continue — but that will be really hard to judge.”

Toronto continued to move toward tax equity, increasing the tax rate for residential properties by a higher percentage than commercial.

As a result, the commercial-to-residential ratio continued its 18-year downward trend and dropped by 2.42 per cent — the most substantial reduction in the survey. However, the 3.36 ratio was still fourth-highest in the country.

Ottawa raised its commercial rate by a greater percentage than residential, resulting in a 0.95 per cent increase to its ratio, which now sits just below the national average of 2.8 at 2.39.

Fletcher is unsure why Ontario keeps postponing its property tax reassessments, but said it’s causing increasing problems — especially with the post-pandemic variability in assessments for various property classes and types.

“The assessed values are so outdated that the apportionment of property tax in that province is no reflection of where the market is today,” said Fletcher. “The biggest losers, in our opinion, are office and retail properties.

“From a relative perspective, those markets have been much weaker than industrial over that time period. So, industrial is stuck with a lower proportion of tax than it should in the current market conditions.”

Calgary and Edmonton face similar pressures

Calgary had the largest commercial-to-residential ratio increase of the cities surveyed, climbing 10.27 per cent to 3.07.

Continuing a trend in place since 2015, the commercial assessment base contracted year-over-year due to declining office assessment values, while the residential assessment base experienced an eight per cent increase due to a surging single-family market.

Edmonton faced similar pressures as Calgary as a result of the latest reassessment, causing its ratio to increase by 6.5 per cent to 2.68.

Fletcher believes commercial property tax rates can have a significant impact on companies in deciding where to open, expand or relocate — particularly when it comes to the outskirts of major cities.

“I don’t know that the property tax question is enough to drive a decision on if you’re going to build a warehouse in Saskatchewan versus Calgary necessarily,” said Fletcher.

“But definitely, when it comes to decisions of if you’re going to be inside the city limits or on the outskirts, that’s a big issue in all the major cities in Canada.”

Fletcher noted communities just outside of Calgary have much lower commercial property tax rates, so there’s been much more industrial development in those municipalities to take advantage of lower overall costs — which include taxes.

Halifax, Winnipeg, Saskatoon and Regina

The Halifax Regional Municipality increased the commercial tax rate and dropped the residential rate, resulting in a 7.16 per cent increase in its commercial-to-residential ratio to 3.06.

Winnipeg’s ratio dropped slightly from 1.93 to 1.92 – but it would have been above 2.2 if the school rebate and business tax were considered.

It’s anticipated the school rebate will be increased for 2023, which will further widen the gap between commercial and residential taxes.

Saskatchewan is in the second year of its four-year assessment cycle and values haven’t shifted.

Saskatoon and Regina continued a six-year trend of posting a ratio below two and remained static between 2021 and 2022 at 1.61 and 1.51, respectively.

Those two ratios were the lowest in the survey.

Source Real Estate News EXchange. Click here to read a full story

CRE’s ‘Amazing Run’ Hits Roadblocks: PwC/ULI Trends Report

The “amazing run” for Canada’s real estate industry has come to an end, a PwC executive told participants at the 44th annual Emerging Trends in Real Estate report event.

Held at The Carlu in Toronto on Nov. 1, the well-attended breakfast event was sponsored by PwC and the Urban Land Institute to offer insights and commentary into the annual report.

The just-released report provides an outlook on real estate investment and development trends, finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the United States and Canada.

It reflects the views of individuals who completed surveys or were interviewed as part of the research process, including investors, fund managers, developers, property companies, lenders, brokers, advisors and consultants.

Things are less positive than they were

“Canada’s real estate industry has been on an amazing run,” said PwC Canada partner and national real estate leader Frank Magliocco, who presented an overview of the Canadian portion of the report. “Capital was plentiful and rents, valuations and returns were all going up across the country.

“There was stability, along with immigration trends, that continued to make Canada an attractive place to invest.”

While the COVID-19 pandemic created uncertainties, the real estate industry got through it without as much damage as some may have initially feared.

This year, however, has brought a mix of interest rate increases, high levels of inflation and a geopolitical environment that has created uncertainty throughout the global economy. The result has been a significant disruption to the Canadian real estate market.

Magliocco said in 2021 there was too much available capital, which created more competition for deals and pushed prices higher and higher.

“Fast forward to 2023 and the opposite is true,” he added, noting that successive interest rate increases by the Bank of Canada and cautious lenders are decreasing competition for deals and making it harder for real estate companies to raise capital and move projects forward.

Three major trends

According to the report, there are three trends that are expected to be particularly salient as we head into 2023 and, likely, a recession:

•    navigating a period of price discovery amid rising challenges around costs and capital availability;
•    addressing urgent imperatives around environmental, social and governance (ESG) matters;
•    and finding meaningful solutions to escalating concerns about housing affordability.

Rising labour wages and a shortage of workers, along with issues regarding material pricing and availability, have contributed to higher construction costs, project delays and budget overruns.

According to Statistics Canada, residential building costs were up 22.6 per cent on a year-over-year basis in Q1 2022. Cost increases for non-residential construction were 12.8 per cent.

This has led to a pause in both developments and transactions, according to Magliocco, because it’s difficult to make numbers work financially in the current environment.

This period of price discovery has led to buyers and sellers having differing expectations and views of valuations, leading to a slowdown in deal activity.

While challenging, the report says an environment like this also presents opportunities. Companies with less leverage may be able to secure assets at more reasonable prices and, while some sources of financing may not be as readily available, the private debt market could step up and help fill some of the gaps.

ESG considerations growing in importance

At a time when financing is both less available and more expensive, companies with a strong ESG track record will have an advantage in attracting investment from institutional players and sourcing new forms of capital.

There’s also growing evidence that companies with strong ESG commitments are expected to be more profitable in the medium to long term through getting higher sale prices and rents for green buildings, reducing operating costs and increasing operational efficiency.

“The ESG journey, if done well by organizations, will not only preserve value but it will also create value through improved operating cash flows and more attractive capital from lenders and investors,” said Magliocco.

While climate change is a major focus of the ESG agenda, concerns about social issues — including inclusion, diversity and pay equity — are also on the rise.

Housing affordability crisis

Canada needs to build 5.8 million homes between 2021 and 2030 to restore housing affordability, according to the Canada Mortgage and Housing Corporation, but there were only 271,000 housing starts in the country last year.

While people are leaving Toronto and Vancouver due to high housing prices and rents, as well as the growth of remote working, the unaffordability issue is following them to smaller markets due to a lack of supply. The problem is only likely to worsen as Canada increases the number of immigrants it allows into the country.

Increasing development charges and approval times are adding to home-building costs and to the affordability crisis.

Despite these issues and concerns, industry members interviewed for the report are optimistic about the long-term outlook because the fundamentals of the Canadian property market remain strong.

Asset class outlooks

Magliocco also provided brief outlooks for a variety of real estate asset classes in Canada.

While there are some concerns the industrial market may be overheated as vacancy rates hit all-time lows and rents and property valuations explode upward, it continues to have strong demand and people remain bullish on the sector.

Purpose-built rental apartment demand has recovered from 2020 lows and vacancy rates have tightened, but higher rents are also impacting overall housing affordability. Valuations for multiresidential remain strong, as do the supply and demand fundamentals.

There’s uncertainty in the office market and some organizations are moving forward with plans to offload significant amounts of space. This includes the federal government, which Magliocco said is looking to shed 15 to 20 per cent of its 42 million square feet.

Retail is continuing to rebound from the effects of pandemic lockdowns and vacancy rates are starting to recover as shoppers return to brick-and-mortar stores and become somewhat less reliant on e-commerce.

Condominiums continue to be a growing part of the housing market and the outlook remains positive for the asset class. There’s also a desire from some buyers for bigger unit sizes to accommodate home offices.

Single-family housing has a mixed outlook as high prices and interest rates are putting a damper on the market. There has, however, been increased interest in more affordable types of single-family homes, such as duplexes and townhouses.

Magliocco said the life sciences asset class follows only industrial and multiresidential as a best bet for investment success in 2023.

Source Real Estate News EXchange. Click here to read a full story

Actionable Tips for Commercial Real Estate Brokers

Longtime U.S.-based investor and agent Joe Killinger joins host Chad Griffiths for this episode of The Industrial Real Estate Show.

Their discussion touches on what successful agents are focusing on right now, incorporating social media into your brokerage business, tactics to improve your networking skills and other topics related to the current industry environment.

This interview was conducted live, so comments and questions from participants will appear in the accompanying chat window.

Killinger has been active in the real estate industry for three decades, wearing different hats and at times multiple hats!

Over the years he has been an agent, investor, syndicator, founder and operator of companies as well as properties in which he invests.

During his 30 years in the business, he has been responsible for the sale of and/or directly involved in the marketing of over 5,900 assets, resulting in closed transactions totalling over $900 million throughout the United States.

Source Real Estate News EXchange. Click here to read a full story

Dream, Singapore’s GIC to Acquire Summit Industrial for $5.9B

UPDATED: Dream Industrial REIT (DIR-UN-T) and Singapore-based investment manager GIChave formed a joint venture to acquire Summit Industrial Income REIT(SMU-UN-T) in an all-cash transaction that values the trust at approximately $5.9 billion.

The Monday-morning announcement indicated Summit unitholders will receive $23.50 per unit  in cash for their shares. The investment is a 31 per cent premium to Summit’s closing price on Nov. 4, a premium of 33.4 per cent to its 20-day weighted average price and a 19.5 per cent premium to Summit’s current consensus estimated NAV of $19.66 per unit.

“We are pleased to provide an immediate and certain premium value to our unitholders through this all-cash transaction with GIC and Dream,” said Paul Dykeman, chief executive officer of Summit, in the announcement. “The entire board of trustees and management team are proud to have executed on our strategy to develop and aggregate an attractive, diversified portfolio with a team that is dedicated to delivering best-in-class services to our tenants, and this value optimization transaction represents a successful culmination of these efforts.

“We are confident this transaction is in the best interest of the REIT and unitholders.”

The arrangement is structured with GIC as a 90 per cent partner, and Dream holding the other 10 per cent. Dream Asset Management will be the property manager for the venture.

“Highly strategic transaction” for Dream

The transaction remains subject to unitholder and regulatory approvals, and is expected to close in early 2023.

“We are pleased to bring GIC’s expertise in real estate investing together with Dream’s 25 years of experience as a world-class real estate developer, owner and asset manager. Through our partnership, Summit’s assets will be positioned for continued success,” said Lee Kok Sun, chief investment officer of real estate for GIC, in the release.

“Summit has a premier portfolio of industrial properties defined by strong sector fundamentals, resilient cash flows, and stable market rent growth in key markets across Canada,” said Adam Gallistel, head of Americas real estate for GIC, in the release. “This is another strong addition to GIC’s global real estate portfolio.”

The Summit acquisition represents what Dream calls a “highly strategic transaction”, growing its exposure to the Canadian industrial market, diversifying its revenue streams through growth of its property management vertical, and introducing a new source of growth capital in high-growth industrial markets.

“We are excited to announce this transformational transaction,” said Brian Pauls, chief executive officer of Dream Industrial REIT, in the announcement. “Combining with Summit will add scale and quality to our Canadian platform and amplify our fee generation business. The commitment from GIC, a best-in-class, global sovereign wealth fund investor, to partner with DIR on this large-scale transaction is a testament to the quality of our employees, platform and vision as a leader in the Canadian industrial space.

“This transaction will provide DIR with the ability to grow accretively with a more diversified source of growth capital.”

The transaction will significantly increase Dream’s property management business. Upon closing, Dream Industrial will manage 69 million square feet across Canada, USA and Europe, including 32 million square feet on behalf of its institutional clients in North America.

It will also more than double the scale of Dream Industrial’s Canadian industrial portfolio under management, with total GLA of 43 million square feet. Dream Industrial’s pro forma exposure by owned GLA will be approximately 53 per cent in Canada, 41 per cent in Europe and six in the United States.

“We have been impressed by Summit and their continued strong execution and we are thrilled to welcome an exceptional team to Dream,” said Michael Cooper, the founder of Dream Group of Companies and a trustee of Dream Industrial REIT, in the announcement. “Summit’s business fits perfectly with Dream’s experience and management expertise, and we look forward to partnering with GIC.”

GIC and DIR have agreed they will continue to pursue acquisition opportunities in major Canadian industrial markets.

Summit’s industrial portfolio

Over 99 per cent of Summit’s portfolio properties are located in geographies where Dream Industrial already operates. The combined portfolios are focused on “high quality logistics and warehousing assets in Canada’s largest urban markets”, with approximately 60 per cent of total GLA in the Greater Toronto and Montreal Areas.

The Summit portfolio also offers significant opportunity to generate strong future NOI growth. The Summit acquisition will also increase Dream Industrial’s development pipeline from 6.5 million square feet to 11.1 million square feet (on a 100 per cent basis).

The Dream and GIC venture intends to assume Summit’s $925 million of outstanding unsecured debentures, as well as Summit’s existing mortgages.

Dream and GIC have financing through TD Securities to backstop the mortgages, and Toronto-Dominion Bank has underwritten a $400-million revolving credit facility for future liquidity requirements. The financing has been structured with the intent of Dream and GIC maintaining Summit’s current DBRS Limited BBB credit rating with a positive trend.

Summit expects to hold a special meeting of unitholders to vote on the transaction in mid-December  Summit will release its Q3 financial results on Nov. 9, but, as a result of this announcement will not host an investor conference call.

Slate Reports Higher NOI, Updates Strategic Review in Q3 Results

As it continues to undertake a recently announced strategic review, Slate Office REIT reported gains in net operating income (NOI) and same-property NOI during Q3 2022.

These, along with a number of recent property transactions, were among the topics discussed during the REIT’s Nov. 2 conference call to present its financial and operational results for the quarter ended Sept. 30.

At the end of Q3, Slate  (SOT-UN-T) owned interests in 53 properties in Canada, the United States and Ireland totalling 7.32 million square feet of gross leasable area and valued at $1.96 billion.

“In the face of sectoral headwinds, including a rapid rise in interest rates not seen in many years, Slate Office REIT continues to demonstrate its resilience, offering unitholders a stable and attractive distribution yield, trading upside to its well-supported net asset value and a best-in-class management platform,” chief executive officer Steve Hodgson said to open the presentation.

“Our conviction in the office sector remains strong. We know that physical workspace enables collaboration, culture and innovation. At the same time, we understand that in a post-pandemic era, certain tenants and industries will be more significant users of office space than others.

“As such, we’ll continue to position our portfolio to focus on opportunities that align with tenant demand. We believe well-located, high-quality and modern office buildings with growing strong credit tenants will continue to outperform.”

REIT has committed to review operations

G2S2 Capital Inc. issued a news release and an open letter to Slate Office REIT unitholders on Oct. 20 critical of management and trustee decisions in recent years, including a recent $45-million convertible debenture offering.

The release stated a belief that the trust makes the interests of unitholders secondary to those of Slate Asset Management, its external manager.

Halifax-based G2S2, a private investment holding company, is Slate Office REIT’s largest unitholder.

Slate Office REIT announced a week later it had created a committee of five independent directors, chaired by Tom Farley and Michael Fitzgerald, to oversee the review.

The trust will also retain a financial advisor for the process.

“Notwithstanding the REIT’s attractive assets and longer-term upside, our board of trustees recognizes that market disruptions related to the pandemic and elevated levels of inflation continued to weigh on the valuations of publicly traded REITs, creating a divergence between asset values and unit price,” Hodgson said during the conference call.

“As a board and management team, it is our responsibility to consider every possible opportunity to surface value for our unitholders. To this end, after quarter end, the board formed a special committee of independent directors to oversee a review of strategic alternatives for the REIT as we continue to navigate a highly volatile macro-economic environment.

“The strategic review will play a key role in identifying additional ways to maximize value for all unitholders. All of our routine operations and investment activities will carry on as normal during this period and we intend to provide an update once the process is completed.”

The REIT’s unit price closed at $4.50 on Nov. 2. Its 52-week high is $5.30 while the corresponding low is $4.21. The trust has a market cap of $360.78 million.

Increased NOI and decreasing debt ratio

NOI in the quarter was $26.86 million, a 16.7 per cent increase from a year earlier. Same-property NOI increased by about $500,000 over the prior quarter and $957,000 from a year earlier.

Slate Office REIT’s liquidity was comprised of $37.1 million in cash and $14.61 million in undrawn revolving facilities on Sept. 30.

The Toronto-headquartered REIT, which also has offices in Chicago and Dublin, had a loan-to-value ratio of 58.4 per cent at the end of the third quarter. That was down from 59 per cent in Q2.

Transaction activity

Slate Office REIT sold a two-tower, 405,407-square-foot property, which Hodgson said had tenant and capital risk, at 95-105 Moatfield Dr. in Toronto to an undisclosed purchaser for $97 million on Sept. 23. That was a 12 per cent premium on the purchase price.

The building at 95 Moatfield is fully leased to Kraft Canada and 88 per cent of 105 Moatfield is leased to Thales Rail Signaling Solutions.

Following the end of Q3, the REIT closed on the acquisition of a newly retrofitted class-A property in Chicago’s Lake Forest area for $27.3 million.

It’s adjacent to a lab building owned by Pfizer and anchored by a 10-year lease with Pfizer in a portion of the building, with significant upside on occupancy of the remainder.

“This is new space to the market,” said Hodgson. “Pfizer previously occupied the entire building.

“It’s a beautiful building. It’s certainly the best in that immediate area and probably the second-best in the region.”

Retrofit work will be done in the lobby of the two-winged building, which includes conference space and fitness facilities.

Slate is looking to lease the space for triple-net rents of $18 per square foot, with 50-cent annual escalations.

“We expect quite a bit of demand and Pfizer doesn’t have any exclusives in their lease preventing us from leasing to any other life science or pharmaceutical companies,” Hodgson noted.

Leasing activity

Slate Office REIT completed 109,060 square feet of leasing in 11 renewal and 12 new deals in the quarter at a weighted average rental rate spread of 11.9 per cent. The results were primarily driven by rental rate uplift in Atlantic Canada and strong demand in Ontario.

Fifteen leases totalling 101,322 square feet were not renewed or were vacated.

“There were three that were over 5,000 square feet and the rest were spread out amongst the portfolio and small in nature,” Hodgson said.

The weighted average in-place rent across the portfolio was $19.19 per square foot, 5.3 per cent below current market rent, providing significant opportunity for the REIT to continue increasing rental income.

The weighted average lease term in Slate Office REIT’s portfolio is 5.6 years, and 65.1 per cent of tenants are government or high-quality credit tenants.

“The new leasing that we did in our portfolio had 9.2 years of average term, so that’s clearly a sign that tenants are committing long-term to office space,” said Hodgson.

The portfolio’s occupancy was 81.9 per cent at the end of Q3, down from 83.6 per cent the previous quarter.

195 The West Mall and Irish acquisitions

Part of that is attributable to a phased vacancy by SNC-Lavalin at 195 The West Mallin Toronto, which now has 160,709 square feet available on its 11 floors.

Hodgson said the building, in an area where the trust also owns other properties, is receiving plenty of interest from potential tenants.

“SNC vacated at a rent of $16.50 (per square foot),” Hodgson said. “The starting rents that we have in The West Mall now are $18 to $19.”

Slate Office REIT completed the $254.8-million acquisition of the portfolio of office, life science and light industrial properties owned by Yew Grove Office REIT in Ireland in February.

There has been interest in the portfolio’s vacant spaces, according to Hodgson.

“We’ve made some changes to the teams in place, as well as the third-party sales teams in place, and we’re sort of relaunching it with a marketing campaign more in line with what Slate’s accustomed to elsewhere,” Hodgson explained.

Hodgson expects the REIT’s occupancy to be relatively flat in Q4 because new leasing won’t result in occupancy until the new year in order to give tenants time to fit out their space.

Source Real Estate News EXchange. Click here to read a full story

Raising Ceiling Heights on Existing Industrial Buildings

Host Chad Griffiths is joined by Marty Shiff, president of Toronto-based Rooflifters, to explore the factors which go into increasing clear heights on existing industrial buildings to make them more suitable for some modern tenants.

Among the topics they delve into are what types of buildings are suitable for roof raising, how the process works and timelines and costs.

Rooflifters is a specialized company that hydraulically raises the roofs of low-clear-height buildings to create less costly additional cubic footage. The firm caters to the industrial and retail markets.

The interview was conducted during a live broadcast, so comments and questions from listeners will appear in the accompanying chat window.

Source Real Estate News EXchange. Click here to read a full story

The State of The Logistics and Warehousing Industries

Supply chain and industrial/logistics expert Matt Carroll returns to offer updated perspectives and insights into the most recent trends and developments in the sector.

Among the topics discussed with host Chad Griffiths are falling transportation costs and the impact on the warehouse market where some product shortages are ongoing, and other current trends.

The interview was conducted as part of a live session, so comments and questions will appear in real time in the accompanying chat window.

Carrol is multilingual (English, Spanish and German) and has an in-depth understanding of the complex dynamics of supply chain after spending more than a decade managing operations in the U.S., Canada, the Netherlands, Germany, Australia, Hong Kong, Shanghai and Shenzhen,

Having lived in Latin America for over 12 years, the United Kingdom for two years and the United States for over 20 years, as well as having worked extensively throughout Southeast Asia and Western Europe, Carroll approaches his work with a multicultural perspective.

A graduate of Purdue University, where he also played on the men’s basketball team, Carroll was a four-time Academic All-Big Ten honouree, the recipient of the Distinguished Scholar-Athlete award for outstanding academic achievements and the Ward Lambert academic award.

Carroll previously worked for VOXX International as a logistics manager, Klipsch as a logistics manager and buyer, and for Target as a distribution operations manager.

Source Real Estate News EXchange. Click here to read a full story

Is Industrial CRE Headed for a Crash? Unlikely, and Here’s Why…

I recently participated in my first Twitter Spaces discussion; essentially a call-in show on social media with hundreds of participants listening in and chatting.

One opinionated investor told the panel that industrial is headed for a crash. The market was too hot and industrial construction was booming, with tens of millions of square feet being built across Canada.

He had a number of salient facts that raised concern for industrial CRE, which were all true! And yet I completely disagree with his conclusion.

I’ve heard this skeptical sentiment about industrial from brokers as well; that surprised me as I tend to be more pessimistic than deal-makers in real estate.

And at my most recent conference, I fielded several questions along the lines of “can industrial really keep this up?”

Bear and bull arguments for industrial

I think it can, but let’s outline the bear argument for industrial:

• Construction is at record high levels, triple the level of five years ago. Absolutely true: construction was high relative to long-term trends even before COVID, and it’s higher still now.
• Rent growth cannot continue at the current pace. Some major markets are seeing 40 to 60 per cent yearly rent growth. At this rate, rents will be doubling every two years which isn’t sustainable.
• Cap rates have dropped too much for industrial relative to other assets. This is also true; rates have dropped more than any asset class over the past 10 years and are now among the lowest ever recorded.

And yet . . . I am still bullish on industrial, even conceding all those points. How can that be?

While construction is high, it’s still a very small percentage of the overall inventory.

Even with record high square feet under construction, this accounts for only ~2% of the total inventory in the country, which is in the billions of square feet of space.

If all the construction were miraculously completed tomorrow morning, we would still have a tight industrial market, well below “balanced.”

And other major markets have far higher levels of development underway – in some U.S. metros like Atlanta or Dallas, the number is closer to seven or eight per cent.

Blackstone / Pure a big player

Foreign investors have developed an appetite for Canada industrial, with big private equity (PE) and institutional investors getting involved.

Blackstone, the world’s largest PE firm (mainly via its subsidiary Pure Industrial in Canada) has been the No. 1 acquirer of Canadian industrial space during COVID.

While we see unprecedented prices for industrial rents, it’s all relative – compared to London, Singapore, Los Angeles and other world markets, our rents look reasonable.

The unrest in Ukraine has also motivated some investors to redirect capital to the safety of North America generally and Canada specifically.

Additionally, the Canadian dollar has depreciated considerably in the past year (down about 12 per cent), making investment more attractive for those with Euros, Swiss francs or U.S. dollars.

Finally, there is a huge shortage of development land around most cities. Montreal, Toronto and Vancouver all have some form of “greenbelt” or farmland protection, which drastically restricts sprawl beyond a certain point.

Land constraints just one factor

These land constraints define the industrial market and the constraints aren’t going away.

Removal of the greenbelt would be a seismic shift from the status quo and even more development-minded governments don’t seem to have an appetite for that change.

The fundamentals of industrial are so outrageously strong that we’re seeing unprecedented situations across the country:

• Yearly rent growth in Montreal exceeding 60 per cent;
• Vancouver achieving record high rents in Canadian history;
• Availability rates below one per cent in many markets;
• Canadian cities among the strongest major industrial markets in the world.

While this situation won’t sustain forever, I still see a positive outlook for industrial in the near term.

The bigger question for industrial going forward is the future of e-commerce.

The industrial market is not driven by “old economy” industries such as resources, chemicals or manufacturing.

Instead the warehouse boom is based upon fulfillment centres for online purchases, covering everything from food to clothes to electronics to home furnishings.

E-commerce less mature in Canada

While e-commerce had been growing for years, COVID obviously supercharged the movement to shopping online.

This drove a tremendous expansion of the biggest players like Amazon, Costco, Walmart and the grocery giants in the suburban areas of most Canadian cities.

E-commerce usage has flattened out in 2022, foiling the predictions of unlimited growth. The reopening of shopping, entertainment and travel have dampened the share of dollars spent online.

And the e-commerce system is stretched, with shortages of warehouse workers and delivery drivers.

Nonetheless, e-commerce is less mature in Canada than in many other developed countries; concepts like same-day delivery or online grocery are relatively new to the market here, but are standard in the U.S. and elsewhere.

There’s plenty of room to grow in the next few years and many previously “off-line” customers have discovered the ease of online shopping.

Between land shortages, investor interest and limited construction, there’s still a bright future for the industrial leasing and investment market in Canada.

Source Real Estate News EXchange. Click here to read a full story